The share price graphs of our two venture capital trusts do not look at all like the graphs of normal listed companies. While the graph of BP, say, resembles the outline of a distant mountain range, full of jagged changes of direction big and small, that of Northern, one of our VCTs, looks like something man-made: the Manhattan skyline perhaps. Put another way, the share price often stays static for weeks on end, then changes dramatically.
Why is this? Investors typically buy and sell shares in reaction to news and there isn’t a lot of it from VCTs. They largely own shares in unlisted companies that themselves say little or nothing publicly. Often there is nothing for shareholders to go on other than announcements from the VCTs themselves, such as their interim and annual results.
When such announcements are made the share price reactions can be dramatic. Northern has illustrated this especially well recently with two huge share price rises over the past eight months. In December the shares gained 21.6pc in one day; then over the course of two days last month they enjoyed a rise of 12.2pc.
There were one or two smaller, but still sudden, moves up and down; otherwise, as our own graph shows, the shares have been largely static. They fell heavily yesterday, but only because they went ex-dividend.
Both big jumps in the share price were in response to announcements of results, annual last December and interim last month. As we have not covered NVT for a year it’s worth taking a look at both.
The annual results covered the period to Sept 30 2020, so they included about the first six months of the pandemic. While the trust reported a modest rise in its net asset value to 70.7p from 68.9p a year earlier, much more striking was the recovery that the former figure represented from 58.2p at the end of March last year, which had resulted from “significant unrealised reductions” in the value of its assets caused by the arrival of the virus.
“This [revaluation] was at the very start of the first lockdown when the impact of the pandemic was almost impossible to predict,” the trust said. By September of course things felt on a more even keel and the trust was able to reverse that earlier loss of book value. Shareholders welcomed the confirmation with the first big rise in the share price.
It was a similar story for the interim announcement last month. The net asset value rose by 12.9pc relative to the 70.7p reported in December to 79.8p. Again, an “unrealised” rise in the valuation of the holdings was largely behind the gain but the trust did make two profitable disposals over the period.
The sale of Agilitas IT Holdings made a return of 8.1 times its original cost; the disposal of It’s All Good, a snacks firm, delivered a return of 3.2 times. Better still, in April 2021 another holding, Entertainment Magpie, was admitted to trading on Aim under its new name of musicMagpie.
“Our original 2015 investment of £1.6m has produced cash proceeds to date of £10m and we have retained shares valued at £8.6m based on the flotation price; this represents a return of 11.6 times the original cost,” the interim report said.
Of course Northern and our other VCT, Baronsmead, are in our Income Portfolio because they pay dividends, funded largely by the periodic sale of assets but to some extent by interest on money lent by the trust to the businesses in which it owns stakes. The final divid declared by Northern in December was 2.5p a share, which took the total for the year to 4p. A further 2p was declared in the interims last month, with a 6p special on top.
Over our period of ownership, which began in October 2016, Northern has paid or declared a total of 34p in dividends (3p in 2016, 11p in 2017, 4p in 2018, 2019 and 2020, 8p so far this year). This represents just under half our original investment at 70p a share earned back in income alone in a little less than five years.
We put a notional £20,000 into NVT, so our divis come to £9,714. And VCT dividends are tax-free for all investors, even those who didn’t buy their shares via an offer from the company but on the open market.
We can expect our future dividend stream to be lumpy but the VCT offers diversification of income sources within the portfolio.
Questor says: hold
Share price at close: 69.75p
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